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Optimism for M&A builds, but prospects unclear

Tony Kuhel is a partner in http://www.thompsonhine.com/home/ target=_blank class=red>Thompson Hine's Corporate Transactions & Securities practice group and is vice chair of the practice in Cleveland. He focuses his practice on mergers and acquisitions, private equity and venture capital transactions.

As the trials and tribulations of year-end closings fade from memory, the mergers and acquisitions community is engaged in the annual ritual of sizing up activity in the prior year.
The early returns on 2012 reflect an uneven pattern in terms of deal activity. While an active first quarter increased expectations for a strong year, the second and third quarters exhibited a decrease in M&A activity, primarily as the result of weaker-than-expected results for the U.S. economy and uncertainty in the Eurozone.
And although returns are still coming in for the fourth quarter, it appears that deal volume was strong (though perhaps not as strong as anticipated) as buyers and sellers approached the “fiscal cliff” and became increasingly concerned about the specter of increasing capital gains and marginal income tax rates.
Much more interesting, however, is predicting how trends from 2012, together with current market, economic and political conditions, might affect the prospects for dealmaking in 2013.
In certain respects, the outlook for M&A activity has never been brighter. With deep pools of available capital and a historic interest rate environment, conditions are ripe for buyers to deploy equity capital, leveraged by readily available and inexpensive debt financing.
On the sell side, a stabilized economy has resulted in improved financial performance for companies most likely to go to market, and a generation of business owners is approaching retirement and may be looking to monetize its “sweat equity.”
However, these same conditions existed for most of 2012 as well, and overall M&A activity still took a step back (especially if activity in the fourth quarter is discounted for the effects of the “fiscal cliff”). The critical question is whether these conditions will finally bring about a thriving M&A market in 2013, or will the new year exhibit more of the same uncertainties and ebbs and flows that we experienced in 2012?
In December, I attended a seminar sponsored by the M&A Advisor that attempted to address this question, and the consensus was there is no consensus. If the theme of the seminar, “The Long Pause,” was any indication, it would not seem that 2013 is a year about which to get too excited.
However, there is cautious optimism among M&A practitioners. First, the investment banking community does not expect the new deal pipeline to be depleted more than usual by the rush for year-end closings. Meanwhile, economists predict steady, although not robust, growth in the U.S. economy that should help maintain M&A activity through the middle part of the year.
The turn of the calendar also should ease some of the political uncertainty inherent in an election year. We should expect the health care and energy sectors — especially in Northeast Ohio — to continue to be a critical component of M&A activity in 2013. Of particular interest will be major pharmaceutical manufacturers, which will be looking to replace an unprecedented number of drugs coming off patent in the next 12 to 24 months, and the health care payer space, as the implementation of the Affordable Care Act becomes a reality.
So while it seems more likely that M&A activity in 2013 will be closer to 2011 than the “glory days” of 2005 through 2007, those that survived the instability of 2008 and 2009 realize that forecast is not all bad.
My hunch is that 2013 will be a year of continued recovery, both in the overall economy and in terms of M&A activity, but that 2014 is the year that the M&A community should look forward to.

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